{"id":6600,"date":"2026-07-27T17:57:07","date_gmt":"2026-07-27T15:57:07","guid":{"rendered":"https:\/\/maraz.es\/?p=6600"},"modified":"2026-07-30T12:04:50","modified_gmt":"2026-07-30T10:04:50","slug":"refinancing-companies-in-distress-guide","status":"publish","type":"post","link":"https:\/\/maraz.es\/en\/refinancing-companies-in-distress-guide\/","title":{"rendered":"Refinancing Companies in Distress: a Middle-Market Guide"},"content":{"rendered":"

Refinancing Companies in Distress:<\/strong> When a company runs into trouble, the clock starts working against it. The 2022 reform of Spain\u2019s Insolvency Act changed the rules of the game entirely: today the business owner who acts early keeps control, and the one who waits often loses it. This guide explains, without detours, how distress is diagnosed, what truly measures a company\u2019s ability to pay, how banks negotiate, and which tools \u2014 financial and legal \u2014 determine who emerges stronger from a restructuring and who is left out.<\/strong><\/p>\n

Temporary liquidity strain or structural insolvency: the diagnosis that changes everything<\/strong><\/h2>\n

The first decision, and the most expensive one to get wrong, is telling apart a passing cash problem from a deeper deterioration. They look alike from the outside \u2014 in both cases there is not enough money to pay \u2014 but they call for opposite treatments.<\/strong><\/p>\n

Temporary liquidity strains<\/strong> are timing mismatches between collections and payments that do not compromise the viability of the business: a major customer who pays late, a seasonal spike in inventory, or growth that consumes working capital<\/a> faster than the company generates it. They are solved with the usual tools: credit lines, commercial discounting, factoring or a renegotiation of supplier terms.<\/p>\n

Structural insolvency<\/strong> is another matter. Here the problem is that the business, as it stands, no longer generates enough cash: eroded margins, recurring operating losses, a cost of debt that exceeds the return on assets. In this scenario, deferring maturities without touching the underlying issue \u2014 what the Anglo-Saxon jargon calls *extend and pretend* \u2014 only destroys value. What is needed is a far-reaching financial restructuring<\/a> and operational overhaul: haircuts, debt-to-equity conversion or asset sales, thoroughly rethinking the company\u2019s financing options<\/a>. It should be framed within the options available in a business crisis<\/a>.<\/p>\n

To avoid confusing the two, a static balance-sheet analysis is not enough. You have to look at the break-even point<\/strong> (if the company operates below it, it burns cash month after month), the trend in the EBITDA-to-cash conversion margin<\/strong> and the average maturation period<\/strong> (cash conversion cycle). And, above all, you have to model scenarios: what happens if sales fall 15% or if interest rates rise. A profitable company can die of a poorly diagnosed liquidity problem; and a company with cash may in fact be structurally broken.<\/p>\n

The metric that truly matters: CFADS<\/strong><\/h2>\n

EBITDA is useful, but it misleads in distress: it is an accounting result, not money in the bank. The benchmark metric for measuring real repayment capacity is Cash Flow Available for Debt Service (CFADS)<\/strong>. Its calculation starts from EBITDA<\/a> and adjusts it down to the cash that is genuinely free:<\/p>\n

CFADS = EBITDA \u00b1 \u0394 NWC \u2212 maintenance CAPEX \u2212 cash taxes<\/strong><\/p>\n

The logic is straightforward: to EBITDA you add or subtract the change in operating working capital (if working capital grows, it absorbs cash and subtracts; if it is optimised, it releases cash and adds), you deduct only the CAPEX that is essential to maintain productive capacity \u2014 expansion CAPEX is discretionary in a crisis \u2014 and you subtract the taxes actually paid.<\/p>\n

That CFADS is compared against debt service (interest plus principal amortisation) through the coverage ratio, the DSCR<\/strong>:<\/p>\n

DSCR = CFADS \u00f7 (interest + principal amortisation)<\/strong><\/p>\n

If the projected DSCR falls below 1, the company cannot pay out of what it generates: it is consuming reserves or taking on new debt to pay the old. Most middle-market lenders require a minimum DSCR of around 1.25x to consider a structure sustainable. Where that threshold is not met, the CFADS model itself indicates how much debt is excess \u2014 how much must be converted into equity or written off \u2014 and it becomes the objective basis for the entire negotiation. It is the quantitative translation of managing with a focus on generating free cash flow<\/a>.<\/p>\n

The three tests under the TRLC: why acting in time is everything<\/strong><\/h2>\n

Spain\u2019s Consolidated Insolvency Act (TRLC), following the reform introduced by Law 16\/2022 that transposed the EU Restructuring and Insolvency Directive, defines three stages of insolvency. Knowing which one you are in determines the roadmap and your room to manoeuvre:<\/p>\n